The reverse repo rate under the liquidity adjustment facility, determined with a spread of 100 basis points below the repo rate, stands automatically adjusted to 6.75 percent.
The RBI also slashed the cash reserve ratio ( CRR) by 0.25 percent to 4 percent. As a result of this reduction in the CRR, around Rs 18,000 crore of primary liquidity will be injected into the banking system.
The bank last cut rates in April 2012 following an aggressive monetary tightening drive to contain inflation. It has been resisting calls from business leaders and politicians to reduce borrowing costs to spur the economy.
In a report on the economy, issued a day before its policy review, the RBI has lowered the growth projection for the current fiscal to 5.5 percent from 5.6 percent projected earlier. They have also cut the growth forecast for the next financial year to 6.5 percent from 6.6 percent.
As regards inflation, the RBI said it was likely to moderate below its projection of 7.5 percent by March-end. However, it added, "suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn stick."
Referring to recent reforms initiatives, it said, "(they) have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy. Business sentiments remain weak despite reform initiatives and consumer confidence is edging down."
Referring to the problem of rising Current Account Deficit (CAD), difference between outflow and inflow of foreign exchange, the RBI said it was likely to exceed 4 percent for the second successive year in 2012-13.
"The CAD/GDP ratio reached its highest ever peak of 5.4 percent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening of trade deficit," the RBI said.
Source:ZeeNews
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